Online Shopping: Not Dead Yet!
From Macy's to Wal-Mart to Sears , the retail management that I've spoken with over the past year have all emphasized how important the online segment of their business is becoming. Macy's CEO Terry Lundgren says consumers who shop online are 30% more productive than those who shop in just one channel.
So, is the decline of online shopping as suggested by the New York Times greatly exaggerated? The "hyperinflation" growth rates may be but sales and growth are not.
Online shopping is not dead yet, at least according to data from Shop.organd Forrester Research. Online sales will hit $259 billion dollars in 2007. What is changing is the rate of growth and the product sales dominating the online sector. Apparel, footwear and accessories are now taking more market share, beating out some of the older segments of the online market that may have become saturated. 'The State of Retailing Online 2007', a study conducted by Shop.org and Forrester Research (released by the NRF on May 14th), forecasts that total online sales are expected to hit $259 billion in 2007. That number is in marked contrast to the $116 billion figure cited in the Times article.
According to Scott Silverman, the Executive Director of Shop.org, even when you strip out travel sales (the largest sales segment of the online business) from the overall $259 billion sales figure, Forrester and Shop.orgestimate that sales will hit $174.5 billion in 2007.
Some important points about online shopping:
1. E-Commerce is still a relatively new channel of shopping within retail. A 25% growth rate like the industry saw in 2005 (shop.org figure) is a tough pace to maintain but that doesn't mean that sales are "losing steam." The rate of growth slowing in the U.S. shouldn't be considered as the same thing as a decline in sales. In fact, Goldman Sachs just published a report this week characterizing growth in e-Commerce as "still strong with 20% US growth and 25% worldwide growth expected in 2007E driven by solid increases in both online shoppers and spending per buyer." Goldman's analysts are still putting money on online retail growth.
2. Last year was the first time that apparel, accessories and footwear outpaced sales of computer hardware and software. Shop.org is forecasting online apparel, accessories and footwear sales to come in at $22.1 v. $18.3B last year. Computer hardware/software is coming in at $20.1B v. 17.2 last year. While we may have hit the peak growth rate, according to Jupiter Research's Patti Freeman Evans, that is far from hitting the peak in online sales. One area that does seem to possibly have reached a point of saturation is the online channel for computer hardware and software. Frankly, this isn't terribly surprising. Computer savvy customers were the first to turn to the internet as a sales channel and these shoppers were looking for the items that fit their interest area: computer hardware and software. What is interesting is to see that buyers are willing to purchase online items like clothing that were typically thought to require a tactile experience.
3. Also key: Much of the hype is explained by the law of large numbers. When looking at sales, you have to consider simple math. There are more retailers getting into the online game. That means that as the overall base of sales grows larger, year-over-year revenue changes will become smaller. Rate of growth slowing ISN'T the same thing as actual sales slowing.
4. While online is still a relatively small segment of overall sales (7-10%), the importance of this category stretches beyond the internet. Online buying boosts in-store sales at brick and mortar stores and many companies are now trying to leverage the online space in a new way.
Check out Shop.org's Scott Silverman's blog for further detail.
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